The Inevitability Of Dramatic Inflation

Submitted by Jeff Thomas via InternationalMan.com. No one is very concerned about inflation right now and that’s understandable. Although inflation exists in some sectors of the economy, the present subject of discussion is deflation. Any depression is inherently deflationary since spending is curtailed, which drives prices down. Since 2008, despite all the fudged reports emanating from governments, much of the world has been in a depression since 2008 and remains in one. This will continue until such time as there is a true cleansing of the system – a step the leaders of each jurisdiction have avoided as much as possible, choosing instead to extend the party as long as possible before the inevitable collapse occurs.

Since deflation is the problem that’s staring us in the face now, most economic discussion deals with it. But, historically, when deflation occurs, governments do everything they can do reverse the problem and return to inflation.

To the average person, one type of ‘flation is as bad as another type of ‘flation – he merely hopes for economic stability. And so the effort by governments to not only accept inflation but to recommend its existence as policy seems odd. But then, governments (and banks) benefit from inflation. People can only be taxed so much before they rebel, but inflation acts as a hidden tax and most people don’t recognize that it’s not the number of currency units one possesses that matters, but what level of purchasing power they have. Inflation allows the individual to retain his currency notes, but devalues them so they buy him less in goods and services. Inflation is the unperceived tax.

The US Federal Reserve has done a sterling job of exacting wealth from US citizens. Since it was created in 1913, it has devalued the dollar by roughly 97% and the dollar is now due for replacement. Through the creation of tremendous debt, the US, EU, and many other countries have created a condition that will result in deflation – the very condition that they most dread. There can be no question that they will do whatever it takes to reverse this trend and return to inflation. Indeed, this is their stated policy. Former Fed Chairman Ben Bernanke is famous for his 2002 speech in which he said he would dump currency from helicopters if necessary when deflation occurred. Since that date, he has reconfirmed his commitment nearly every year, as has his successor, so there can be little doubt as to what the Fed will do to address deflation.

Add to this the fact that the stock and bond markets are in bubbles of historic proportions, assuring the inevitability of crashes in the near future – events that will contribute greatly to deflation.

But, given the choice, wouldn’t we all prefer a bit of inflation to deflation? Yes, in this we would agree with the Fed and the ECB, but worse than either of these possibilities is that green-eyed monster – hyperinflation. At present, we feel we’re so far away from this possibility that, for most people, it’s not even a question. Trouble is, hyperinflation, when it comes, comes very fast and is uncontrollable.

So, how does it happen?

Hyperinflation never occurs spontaneously. It always happens in essentially the same way when governments attempt to artificially manipulate currency. It has occurred on more than twenty occasions around the world in the last hundred years. The most recent occurrence is currently underway in Venezuela.

But a textbook example was the Weimar hyperinflation of 1922–1923. In that instance, the government, along with the central bank of Germany, was facing a collapsing economy, so they did the worst thing possible – they expanded the creation of currency in the belief that if people had more of the stuff, they would spend more and the economy would boom. Unfortunately, the money creation only resulted in rising prices, not greater wealth (True wealth is only created through the creation of more goods and services). So, they printed more. Then more again, and again, and again. With each printing, the problem worsened and the bankers and political leaders reasoned that if they could only print enough, the problem would be solved. It’s important to note that at no time did anyone (not the government, nor the banks, nor private industry, nor the unions) suggest that the printing itself was the problem.

Eventually, inflation became so dramatic that the German people realised that they were better off dumping reichsmarks in favour of goods. As soon as workers were paid, they’d buy anything – food, clothing, anything that wasn’t going up in price as rapidly as the reichsmark was going down.

It is at this point that inflation becomes hyperinflation. It’s never intended by anyone (least of all, governments) to occur but, once the population begins to think of money as something to get rid of instead of something to possess, the monster is born and it happens so quickly that a hamburger that costs $5 today may cost $50 three months later, $500 after a further month, and $5,000 the following week. Soon, a hamburger costs (quite literally) millions.

As hard as this is to imagine, this is what occurs in every case. And in every case, it culminates in a collapse of the monetary system. It’s generally accompanied by a collapse in commerce, riots, food shortages, and famine.

And so, of course, we hope that this time around the leaders of the US, EU, et al, will do the right thing and avoid this eventuality at all costs. Surely, the highly educated folks at the Fed and the ECB will learn from the mistakes of past leaders and not repeat the disastrous mistakes. Hopefully, this time it will be different.

And actually, this time it will be different, but not in the way we would hope. Rather than wait for the crashes and subsequent significant deflation to occur, the Fed and the ECB have already announced a plan to introduce negative interest rates. They describe this plan as being intended to discourage saving and force people to buy goods, causing the economy to boom…just as in Weimar Germany almost one hundred years ago.

But, as discussed above, this is never the outcome. Once a population discovers that dumping currency is preferable to holding it, the green-eyed monster comes knocking.

So, are we around the corner from hyperinflation? No, I believe we have a little breathing time before that, but we’ll be spending that time dealing with the market crashes and deflation that generally come first (unless the leaders decide to pre-empt them by introducing negative interest rates very soon, which they may well do).

Well then, if hyperinflation is not yet a certainty, nor is it necessarily right around the corner, why bother thinking about it?

The reason is that the triggering mechanism of hyperinflation is to be presented to us on a platter in the relatively near future. Its likelihood is now great enough that if we don’t prepare our lives for its eventuality, we’ll be amongst the casualties.

If the German people could have known in 1922 what was coming in 1923, many could have saved their skins. Today, those who choose to internationalise their wealth (however large or small) and even themselves in anticipation of events will have the greatest insulation against the effects of hyperinflation. They have the greatest likelihood to not only survive, but thrive, as the world changes.

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Oliver Wright is an international lawyer, financier, and published author. He is the Founder and CEO of Vanquish Merchant Bank. His writings appear in journals such as the Harvard Journal of International Press-Politics. For six years Oliver was an international litigator and corporate attorney practicing cross-border mergers and acquisitions at Gibson, Dunn & Crutcher, the top ranked litigation firm in the country. Oliver Wright holds dual Master and Doctor of Law degrees in International and Comparative Law from Cornell Law School, where he graduated with honors and was Editor of the Cornell Law Review. He was class major valedictorian at UCLA, where he graduated summa cum laude, phi beta kappa with a BA in Communications Studies.